Thursday, April 14, 2011

Positive credit sharing

Hong Kong has finally adopted a regime allowing banks to share positive credit data - essentially the details of each loan or credit facility taken out.

Historically, banks were limited to providing negative credit data to the credit agency which meant that they had difficulty in verifying the true amount of existing indebtedness of loan applicants. The sharing of positive credit will (supposedly) allow banks to make better credit decisions. Also by making it harder for people to lie about their finances, the risk of default should go down which means that the cost of borrowing should be lower.

While the first argument has merit, it is puzzling that the initial submissions of positive credit data require the affirmative consent of the data subjects (borrowers). In effect, there is no compulsion to agree to disclosure at this stage. Given the duration of the average mortgage loan, this makes the entire exercise somewhat flawed. Going forward, presumably loans will granted only on the basis that the borrower consents to sharing of positive credit data.

The second argument has either limited or no merit. Interest rates are unlikely to go much lower. What is more likely is that the banks will use the data to start charging higher interest rates to borrowers perceived as being less credit worthy.

For my part, I have decided to consent to sharing of my credit data. Firstly, I have nothing to hide as full disclosure was made each time I took out a loan. Secondly, it is possible that failure to disclose will make obtaining future finance either more difficult or more expensive.

As to the process, the banks must have really tried hard to make it as difficult as possible:

1. the consent form does not state any information about the borrower or the loan. I had to fill all that in myself;

2. each loan requires a separate consent;

3. there was no free post envelope;

4. where loans were made to companies, the consent from the company was required but not from the guarantor.

Points 1 and 2 are matters of inconvenience - and an invitation for errors and omissions to create more work for everyone. Point 3 was dealt with by dropping the completed froms in the cheque deposit box at the bank on the way to lunch. Point 4 is clearly a mistake and creates a presumption that information about guarantors will not be included in the data base (which seems wrong).